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Kenya Raises Key Interest Rate to 6.25% to Cool Inflation

The Monetary Policy Committee raised the benchmark lending rate by a quarter of a percentage point to 6.25 percent, the Nairobi-based central bank said in a statement on its website today. Photographer: Trevor Snapp/Bloomberg

May 31 (Bloomberg) -- The Central Bank of Kenya, East
Africa’s largest economy, increased the key interest rate for
the second time this year to curb inflation that has stayed
above the government’s target since January.

The Monetary Policy Committee raised the benchmark lending
rate by a quarter of a percentage point to 6.25 percent, the
Nairobi-based central bank said in a statement on its website
today. All seven economists surveyed by Bloomberg had forecast
the rate would increase between a quarter and 1 percentage
point. The central bank also increased its cash reserve ratio,
the percentage of deposits that banks must hold at the central
bank, by a quarter point to 4.75 percent.

“The central bank should have made a much more bold
decision as they are already behind the curve,” Aly-Khan Satchu,
an independent financial analyst, said by phone from Nairobi.
“The impact is that there will be continued weakness in the bond
market and continued softness in the shilling.”

Inflation accelerated for a seventh month to a 25-month
high of 13 percent in May, as fuel prices rose in line with
surging global commodity costs, while dry weather made food more
expensive, the Kenya National Bureau of Statistics said today.
The government’s inflation target is 5 percent.

‘Building Pressures’

The MPC at its last meeting on March 22 increased the key
lending rate by a quarter point from a record low of 5.75
percent, undoing a cut two months earlier. It cited “building
inflationary pressures.”

Kenya’s weather office reported last week that poor rains
during the so-called long March-to-May rainy season hurt crop
development in many parts of the country, where farming
represents a quarter of the economy. Food makes up the largest
component of the consumer price basket at 36 percent.

The Kenyan shilling has depreciated 6.13 percent against
the dollar since the start of the year, and was trading 0.37
percent stronger at 85.65 as of 5:38 p.m. in Nairobi, compared
with a close of 85.85 yesterday.

The International Monetary Fund last week cut its growth
forecast for Kenya this year to between 5 percent and 5.4
percent, from a projection of 5.7 percent in April.

Kenya, whose inflation rate is the second highest in East
Africa after Uganda, has proposed removing duties on imported
corn and wheat to bolster food supplies, and it cut taxes on
kerosene, a cooking fuel, and diesel to contain price growth.

Gasoline Prices

The retail price of super petrol, the most frequently used
fuel to power vehicles, surged 23 percent between November and
May, Kenya’s Energy Regulatory Commission said.

Efforts by the government to reduce the supply of the local
currency through selling repurchase agreements should also help
bring down inflation, Domenico Fanizza, the IMF’s mission chief
to Kenya, said on May 24. The government has sold 21.4 billion
shillings ($250 million) in repos since May 11.

“The MPC is in a tight spot with accelerating inflation, a
worsening growth outlook due to poor rainfall, and the dampening
effect of high oil prices on economic activity,” Yvonne Mhango,
an analyst with Renaissance Capital who had forecast a half-point increase, said in a May 27 note. There is scope to
“tighten boldly,” she said.